As early estimates of damages from hurricane Harvey point towards an overall economic impact in the low tens of billions of dollars with flooding likely to have caused the majority, the National Flood Insurance Program’s (NFIP) reinsurance layer looks increasingly at risk of paying out.
As our other publication ReinsuranceNe.ws reported earlier today, the NFIP purchased a $1.024 billion reinsurance program at the January 2017 renewal season and this could now be at risk from hurricane Harvey.
The attachment point for the NFIP’s reinsurance program sits at just $4 billion of losses to the Federal flood insurer, with the reinsurance then set to pay up to 26% of the NFIP’s losses from the attachment point up to an $8 billion loss arising from a single flooding event.
Given the severity of the flooding from hurricane Harvey, which is being called the worst rainstorm in American history, it seems almost guaranteed that the NFIP’s reinsurance program will be called on to pay for at least some of the losses the insurance scheme suffers.
The flooding from hurricane Harvey is said to be significantly more severe and widespread than tropical storm Allison from 2001, and that storm caused an NFIP loss of over $1.1 billion.
Harvey has even been likened to hurricane Katrina, a storm that caused roughly $16 billion of NFIP losses, is possibly worse than superstorm Sandy, which caused an $8.4 billion NFIP loss, and the flooding is certainly worse than hurricane Ike, which was a $2.4 billion NFIP loss.
So it’s very easy to see the NFIP flood loss from hurricane Harvey exceeding $4 billion and getting well on the way towards the $8 billion upper exhaustion limit for the Program’s reinsurance arrangements.
The NFIP’s reinsurance program is backed by 25 reinsurers from around the world, with a significant participation from the likes of the major four European players, as well as many Bermudian reinsurance firms.
A $1.024 billion loss could well be coming their way, from the NFIP, which would be the first time that private reinsurance market capital has backed up the NFIP after a major loss event.
Hurricane Harvey continues to bring torrential rainfall with it and this is now heading further along the coastline towards Louisiana, which will exacerbate the situation and increase the losses that the NFIP will have to deal with.
The NFIP is still almost $25 billion in debt to the U.S. Treasury, so the $1 billion of reinsurance support will be very valuable, but not enough to help the Program as it approaches another reauthorisation in September.
It is to be hoped that the magnitude of losses from hurricane Harvey and the sheer devastation the flooding has caused in Texas will highlight the need for NFIP reform and also the role that reinsurance capital and insurance-linked securities (ILS) could play in helping to finance the Program as it reforms.
Reinsurance and capital market backed ILS or catastrophe bonds can lessen the burden for the government to bear, while supporting financing during a time of reform and could also pay out very quickly as well, were parametric triggers to be used to cover the most imminent severe losses.
That could be extremely valuable, for example a parametric flood catastrophe bond that paid out based on the forecast being for over 20 inches of rain in a 24 hour period (as seen with Harvey). A few hundred million dollars of cat bond pay out could already have been mobilised to put towards relied and recovery efforts, had the NFIP or indeed the state of Texas purchased such coverage.
The NFIP said that there is a 17.2% chance of a flood loss event severe enough to trigger its reinsurance in 2017. Hurricane Harvey looks like it could be that event.
Analysts at J.P. Morgan Cazenove concurred, saying; “It would appear that this placement will generate losses for the Reinsurers on the panel, which includes all 4 European reinsurers we believe, although in the context of the overall loss this is likely to be fairly small, in our view. We would assume similar market share on the NFIP programme to the reinsurers’ market wide market share.”